The No Nonsense Guide to Sales Forecasting

Sales forecasting is one of the essential components of business success. It can be the difference between meeting your quarterly targets and falling short of achieving your goals. However, creating an accurate sales forecast is not easy. This is the reason some sales ops managers don’t even try it. Naturally, this is a huge mistake and by the end of this article you will understand why.

What is Sales Forecast?

“Sales forecast” is a future estimate of a team’s, department’s, or even a company’s sales performance over a set period of time. It is influenced by several different factors, which can determine the validity of the prediction.

By starting at the bottom level, Management can easily see the emerging trends. Reps’ individual performance is used to determine the performance of the team. Then the directors can use the teams’ sales forecasts to make predictions about the department. At the top, the Sales VP can use the provided information to estimate the performance of the entire company.

This allows Management to identify potential problems and negative tendencies in advance. It is tremendously helpful when trying to stay ahead of the curve. Accurate sales projection increase the chances of hitting the period’s quota. They can also help with revenue growth and business development.

Purpose

Sales predictions can be used for a variety of different reasons. They are incredibly useful for business owners, sales managers, and investors alike.

Planning and targets

Managers need to set realistic targets. They can use sales projection calculations to set proper goals for salespeople. Tangible objectives are productive for both managers and employees. Managers can follow the progress and notice early on if someone is falling short. On the other hand, salespeople have a clear goal to strive for, which is not always the case if there is no sales forecast.

Companies can also decide whether they have enough people to meet projected demand or start hiring early on. If estimates show inability to handle all incoming business, then managers can start hiring people promptly before the season starts, instead of doing it mid-season. This is essential of newcomers need training.

Funding and financials

Sales forecasting is often used when making financial decisions related to the organization. Readiness to meet a potential surge in demand may not be possible without proper forecasting. If projections show an increase in business the following season, the head of the company may be advised to look for additional investors or to take a loan in order to fund the estimated business growth.

Investors often require sales projections in order to make up their mind about whether to expend money on a certain business. Based on this data, they try to get a rough estimate of their ROI. A positive number of projected sales can be quite beneficial for attracting more outside capital.

Creditors utilize sales predictions, as well. They use them to determine an organization’s ability to cover their debt. It is a good sign if the requested loan and projections are in line. However, we should note it is not the only parameter they use.

Benchmarking and risk assessment

Projected sales numbers can also be used to evaluate the organization’s expected performance as compared to rivals. This allows for some foresight and early measures that may end up mitigating potential losses.

Sales forecasting can also help with risk assessment. If, for example, sales are expected to be low during a certain season, then taking a loan would be risky and ill-advised. Because it’s usually based on data, sales forecasting for making more informed decisions, rather than taking chances.

Objectives

Not all sales forecasts were created equal. In order to get a useful projection, there are several objectives you need to accomplish. Get all of these right if you value reliability.

Accuracy

The first and foremost component of a good sales forecast is accuracy. Whatever else it accomplishes is diminished if it’s not accurate.

Sophisticated sales forecast software can be quite helpful. They use historic data in order to predict future trends. Hence, you get a data-driven prediction.

Although it’s a powerful base, historic data alone is not enough. Other factors also need to be taken into consideration, such as competition changes, technological advancements, market shifts, client needs, reps performance, etc.

Sales breakdown

An increase or decrease in sales doesn’t tell you much in and of itself. However, a sales forecast can help you evaluate focal points by performing a breakdown. If the sales of a certain item are unexpectedly dropping, you want to know about it, even if you’re doing well overall. For example, if your overall sales are going up, but you have a new competitor and they’re doing well on a certain market, that needs to be addressed. Try to always see the forest, but also keep an eye on those trees.

Timeline

Estimated sales figures should include establishing a timeline. If the nature of your sales is seasonal, you need to be prepared to handle the weak and strong seasons. Establishing a timeline would also play a crucial role in resource allocation. It’s also useful in marketing, so you know when the best time to advertise would be.

Organizational needs

An accurate sales forecast is useful for the entire organization. It can help establish supply lines more efficiently. Last moment purchases are usually a lot more expensive than shopping in advance. You can easily accomplish this if you know what you need and when you need it.

Why is Sales Forecasting Important?

Sales forecasts are a fantastic tool to guide important business decisions. The importance of this data-driven process goes beyond that.

Making cash flow decisions

Managers and high-level executives often take sales forecasts into consideration when making critical cash flow decisions. If the data proves to be wrong, this can put the organization in serious trouble. This serves not only to highlight how important this type of projection is. It also stand to show how crucial accurate data has become. Luckily, sales forecasting software has made some significant advancements in recent years and has become incredibly reliable.

Cleaning up the pipeline

Sales managers can remove weak leads from the pipeline and avoid sending the reps on a wild goose chase. This optimizes the process and allows salespeople to focus on those leads that are likely to close.It improves both conversation rates and team morale.

Sales prioritization

Removing weak leads from the pipeline is just one step. A sales manager can also direct reps at high priority leads. Based on the data, certain deals will be more likely to close than others. Armed with this information, sales reps are able to delegate their time and resources more efficiently, resulting in an even further increase in conversions and revenue.

What Factors Influence Sales Forecast?

There are several factors that can influence a sales prediction. They can be broadly put into two categories – external and internal.

External factors

Product changes

An upgrade on your product or introducing new features are closely related to sales and sales projections. Removing a bug or an undesired feature may lead to lots of new business. Conversely, introducing new buggy features or causing customer complaints can lead to notable losses.

Seasonality

The time of the year may have an effect on your sales. For example, the holidays are a time when many product sales rise due to increase in consumer demand. However, at the same time the need for many services drops, so those sales tend to suffer. Some products and services are even more dependent on the season.

Economy

The economy having a huge impact on business is a no-brainer. When the economy is strong, people feel more secure and are more likely to spend. Deals close more easily. This increases sales.

When there are economic shifts, people tend to become more conservative. They scrutinize deals a lot more, which reduces the rates and chances for closure. This decreases sales. The state of the economy needs to be taken into consideration.

Legislative changes

Many people don’t particularly care about politics. However, for a business owner or a sales manager is a mistake not to. Legislative changes may have a huge impact on a business, both positive and negative. It’s erroneous to prepare a sales forecast without taking such changes into consideration.

Industry changes

Changes in the industry can have a dramatic effect on a sales forecast. Going up against a new competitor or an old one who has upgraded their product will definitely affect sales numbers. Consequently, someone else launching a product that complements your can have a positive effect on both businesses.

Internal factors

Policy changes

Policy changes are another huge reason why your sales forecast may be affected. It can have a dramatic impact on employee motivation, close rates, number of customers, and more.

For example, if you were previously offering a discount which you decide to terminate, you can expect the number of closed deals to decrease, while the profit from every deal to increase. Both need to be taken into consideration for the projected numbers.

Human resources

The human factor always has some kind of bearing on projections. Whether your number of employees increases or decreases, that usually indicates some changes in revenue. If you hire a large number of new employees, then a surge in revenue is expected.

Also, if you change your salespeople often, that can negatively impact your revenue. It takes time before a new employee can actually be useful. Alternatively, if you offer multiple services and let everyone do everything, that also has an impact. Your salespeople become jack of all trades, master of none. Specialization usually has a positive effect on sales.

What Do You Need for an Accurate Sales Forecast?

In order to get an accurate prediction, you require several essential elements.

Performance measurements

You need to measure performance before you can predict it. Objective measurements at the personal and team level will help you convey to your team where they stand. It will also assist in creating realistic targets for them to complete. This is an integral component of a sales forecast.

Organised sales process

All sales reps must conform to the same process in order to get accurate measurement. They are to have an agreement about the stages of the process so that they can measure them in the same way. Otherwise, data would be unreliable.

Historic data

Historic data is one of the main predictors of future performance. This is especially true when there aren’t any changes in other variables. It’s a good idea to always take it into consideration, but for that you need to record it, first.

Software

CRM is still one of the most popular models, though it’s quickly becoming obsolete with the advent of machine learning and AI powered sales intelligence. This allows you to make sense of the data much more easily.

Sales Forecasting Methods

There is more than one way to establish sales projections. Some are more data-oriented, and some rely on intuition. Depending on different factors, all of them are useful in one situation or another.

Intuitive sales forecast

Intuitive forecasting is based on the salespeople’s estimates. This allows them to fall back on their own experience and knowledge of the pipeline. They are also the people are in close proximity to the prospects, so their approximation should be fairly accurate.

The downside to this method is that salespeople are often fairly optimistic. This means their forecasts are rather generous, which should be taken into account. As a side effect, intuitive forecasting isn’t overly accurate. However, it’s adequate enough when you don’t have enough data to use some of the other methodologies.

Historical sales forecast

Historical forecasting is directly derived from historical data. It takes a previous period in time and uses it as the basis for the current one. This method can also be quite unreliable, despite the fact it is based on data. It doesn’t take any other factors into account. Market changes, competitors, consumer intent, industry conditions – none of this makes the cut.

A purely historical analysis is not going to give you an accurate estimation. Even if you take into account company growth and seasonality (which already complicates the model a lot more), there are many different factors you’re not taking into consideration. However, if you need a quick and easy forecast, this is the best method in terms of speed.

Stage-based forecast

This method takes the stage in which a certain deal is at the moment as the basis for the likelihood it will close. The further down the pipeline a deal is, the higher the chances of coming to a successful throughition.

So, for example, you know the probability of a certain deal closing. You multiply the value by the probability of success. You do this for all deals and take the average as your overall sales projection.

This is a really easy method to make a forecast. The downside is that it’s not very accurate. Also, it’s highly dependent on your sales people cleaning up their pipelines. The main issue here is that it doesn’t take time into consideration. If a deal is going through the stages quickly, there is a much higher chance of it being completed successfully. On the other hand, if it’s been sitting in the pipeline for months, the chances of closing it are very slim.

Cycle length-based forecast

In order for this method to work, you need to take the length of your sales cycle into consideration, as well as how long ago the lead came in.The more time has passed for a deal in the same cycle, the bigger the chances for closure.

This prevents overt optimism. If it’s too soon in the sales cycle, yet the salesperson is positive the client is ready to buy, the time period will be taken into consideration. This way you won’t artificially inflate the forecast.

The downside is that, like other simple methods, it only takes one factor into consideration. This is not a good idea for something so complex as a sales forecast. If you’re going to use specialized software, you might as well put it to good use.

Multifactor sales projection

The highlight of sales forecasting is the multifactor sales projection. It’s the most advanced method you can use. It is a bit complicated and requires the consideration of several factors. As such, you need a lot more data, but this also makes it far more accurate.

A multifactor sales projection takes the average length of the cycle, historical data, rep performance, and stage to create a complete forecast. In many ways, it bypasses the drawbacks of all the other methods and compensates for their weaknesses. This makes it the most recommended sales projection tool available.

That being said, it still requires quite a bit of data and sophisticated software. It’s also much slower, which isn’t necessarily a bad thing, but it work if you need a projection fast. Also, because it requires so much data, it’s not a good fit for businesses that are just starting out.